What's the big deal?

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John Garnaut cuts through the politics of the free trade agreement with the United States to find the winners and losers.

Mark Vaile arrived in Washington in the aftermath of the Iraq war knowing that no American administration had ever owed so much to an Australian government. The Trade Minister planned to spend a week talking with America's Trade Representative, Bob Zoellick, and return home with an historic trade deal.

What followed was a lesson in George Washington's "great rule" of international relations: political connections with foreign nations will be trumped by commerce.

Vaile wanted to quickly end American protectionism on sugar, dairy and beef, in that order. These alone would account for the majority of benefits Australia might hope to gain from any bilateral trade deal with the United States.

High on his list was for the US to push aside the Jones Act, a curious legal anachronism preventing foreign boats from navigating between any two American ports. It was this trade barrier that meant Tasmania's world class superferries could never find a market in the US.

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Vaile also wanted a commitment from Zoellick to relax work visa requirements for Australian accountants, engineers and other professionals (and their spouses), allowing them to effectively sell their services to the US.

These five goals were all towards the top of Vaile's negotiating list. But after two exhausting weeks the Americans had hardly budged on any of it.

Despite Vaile's scurrying between his Washington hotel and the Trade Representative's office, the to-do list was as long as when he had arrived.

Importantly, Zoellick insisted on provisions involving the Pharmaceutical Benefits Scheme (PBS), local media content and quarantine - all of which Vaile had previously promised would not be affected by any trade agreement. But some Australians stood to benefit. It was a question of weighing competing interests.

On February 8, after just 11 months of negotiations, the Prime Minister, John Howard, picked up the phone to George Bush and sealed the deal.

HOWARD'S trade deal with the US split his negotiating team. It has since split farmers, business people, the Labor Party and the free trade community. Political commentators and editorial writers have lined up mainly in support, economics editors have mainly opposed.

Business people have attacked public interest groups, economists have attacked each other's work, film stars have cried in front of politicians and the Government has been praised and pilloried from all directions.

Howard says the deal will set Australia up for the next 50 years. One study, by the Centre for International Economics for the Department of Foreign Affairs and Trade, estimated the deal was likely to add $58 billion to the economy over 20 years, measured in today's dollars.

A study by the National Institute of Economic and Industry Research, for the Australian Manufacturers Workers Union, found the deal was likely to reduce economic output by $47 billion over the same period.

The distance between the two conclusions is a cool $105 billion - equivalent to the annual economic output of Queensland.

Most independent economists, such as Philippa Dee, who recently left the Productivity Commission to join the Australian National University, estimate the economic reality to lie about halfway between the two.

It may be instructive that the Government overlooked the commission when seeking experts to evaluate the deal.

Ian Macfarlane, governor of the Reserve Bank, ducked a broad question about its worth at a parliamentary hearing in June.

But when asked specifically about changes to investment laws, which the Centre for International Economics says would create most of the benefits from the deal, he said: "I do not know about these little movements at the margin."

WHATEVER the economic and sovereignty concerns, debate is now shifting towards the larger political picture.

"The nature of these agreements is more about building strategic relationships than the net dollar value," says Mark Thirlwell, program director for international economy at the Lowy Institute.

If negotiating the bilateral deal has damaged Australia's multilateral trading credentials, as some economists argue, then that is a "sunk cost" which won't be made worse by going ahead with the agreement now.

John Edwards, chief economist in Australia for investment bank HSBC, says ratifying the agreement could give Australia a seat at the table of any future Asia-Pacific trading bloc.

"I do think there is a tidal wave of FTA deals within the region and we need to be part of this."

But others, such as Dee, warn that the trade deal contains precedents on agriculture, rules of origin, intellectual property, media and pharmaceutical benefits that could make it more difficult for Australia to protect its interests in other forums.

The Opposition Leader, Mark Latham, will decide, probably next week, whether the deal is to sink or survive. He could use economic and geo-political arguments to support a decision either way, or he could reject the deal for social policy reasons.

However, influential Labor colleagues Stephen Conroy and Kim Beazley are pressuring him to defer instead to domestic politics and evade the anti-American tag that Howard has pinned to his chest so successfully.